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Why, how and what

Identifying stocks that are worthy of investment is just the first step in becoming a successful investor

Why, how and what

For all practical purposes, equity research is the study of the abnormal. Maybe the word 'abnormal' worries you. It implies disease and suffering and more such things. Even the dictionary defines abnormal as 'deviating from what is normal or usual, typically in a way that is undesirable or worrying'. However, I use it in the sense of the outlier, the untypical. As an equity investor, I doubt whether the normal or average stock will interest you. Currently, the BSE 500 has a five-year return of 14 per cent per annum, while the median return of the index's constituents is 21 per cent. Surely, at this juncture, you would want something better than that.

Almost all equity research is a hunt for the unusual stock or company, one which stands out from its peers in some way or the other. Of course, this hunt for anomalies by itself does not give you a list of investment-worthy stocks. There could be many reasons why such a mismatch is justified. In a majority of cases, it is actually justified. However, at the end of the process, one is likely to be left with some companies that are decidedly worth buying into.

Even then, as we all know (or should know), the investing process has barely begun. After the numbers comes the psychology. Eventually, whether we investors succeed or fail at reaching our goals depends on much more than just knowing which companies to invest in. Take the current situation, which is just the kind of time which separates the winners from the also-rans. It is reasonably clear that this is a good time to invest. The Indian economy is poised for years of strong growth and there are a large number of companies that will reap the benefits and make their investors richer. And yet, as the falling stock prices testify, there are many investors who are selling and running away as if there is no tomorrow.

It's certainly not the case that good companies are difficult to identify. As long as one follows a methodical and well-designed research process that is driven by experience and understanding, one can always come up with stocks that are worth buying and worth holding. The work we do at Value Research is an example. In our premium Value Research Stock Advisor service, we are continuously able to generate investment ideas where there are actual buying recommendations. Even so, it's certain that in the long run, among the subscribers of Stock Advisor, there would be a very wide range of actual returns that are earned. There will be investors who will manage to select the best among the best, buy them properly averaging their cost and reducing the risk, stick to the investments without panicking in bad times and finally exit them at the right time. On the other hand, there will be investors who will do the opposite, more or less. Most often, they will be victims of the poisonous idea of market timing. They will wait for 'dips' to buy; they will exit at the first sight of a decline; and sometimes they will exit at the first sight of gains because they want to 'book profits'.

In my observation, it is possible to make money with average stock-picking practised in a consistently disciplined way. However, it's not possible to make money without this psychological discipline, even with brilliant stock-picking. That's exactly why, we give so much importance to the why and how of investing and not just the what.